Behavior has consequences! This applies both to individuals and to societies. Learn how most of the crises presented by politicians and the media can be traced to the cumulative effects of our own behavior in 5 key areas: Economic Understanding, Discipline, Responsibility, Critical Thinking, and Perspective. Ignoring behavior leads to failure; using this new model leads to real answers.
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Monday, January 16, 2017

Basic Economic Understanding

Last time I wrote about the “cola tax” in Philadelphia, how
it went wrong and how the flaws were obvious when it was passed last June.It took just a little economic understanding,
which the lawmakers in the city seemed to lack.

To be able to look at economic decisions and foretell
possible problems does not require advanced study of the subject.Ordinary citizens can develop adequate skill
to help them make better everyday decisions and notice the errors of others by
understanding a few basic principles.

First, assume that only people have money.Businesses and governments spend money and
move it around, but that money comes from people.By considering it our money, money that was
taken from us through taxes or won from us by offering a tempting product or
service, we are able to look at economic decisions and see the link back to our
wallets and bank accounts.There is
always a link.

When people (or businesses) invest money, they balance risk
and reward.A bank account pays little
interest for low risk.Corporate bonds
pay higher interest for a little more risk.Return from investments in stocks over a long period is considerably
higher, but sometimes you lose.Running
an established business is risky and the return is generally higher.Starting a new business is even higher risk
and may bring a larger reward, but most disappear in the first two to three
years.Higher reward is generally
expected (and deserved) when taking higher risk.

The concept of supply and demand is straightforward.If something is rare or hard to get, the
supply is low and the price is high.If
something is common, the supply is high and the price goes down.If something is popular, the demand goes up
and people are willing to pay more, otherwise the price will go down until
buyers emerge.Diamonds are rare and
popular, so they are expensive.Great
quarterbacks are in demand by many teams, so they too are expensive.Ordinary water is common – it falls from the
sky – and very inexpensive at the tap; but the fussier you are about the
source, purity and packaging, the more you will pay.

Supply and demand in a free market usually work together to
set a price where both the buyer and seller are satisfied with the outcome.Problems arise when someone starts tinkering
with this balance.Last year the price
of oil stayed low due to more production in the US and the lifting of sanctions
on Iran.OPEC agreed to restrict their
operations hoping the reduced supply would push prices up.Officials in Philly imposed the tax on sugary
drinks hoping the higher price would reduce demand, leading to healthier
citizens.

Laws in some states forbid private enterprises from moving
food, water or generators to a disaster site and selling them at a profit.There is already a low supply, and those who
could afford it might be willing to pay a little more but they can’t.So everyone, rich and poor, waits in longer
lines for the official relief.The well-intentioned
law hurts everyone. Where there is no
disaster, retail stores do exactly the same thing, ship goods from far away and
sell them at a profit – and no one complains.

It is also important to understand business.Businesses are relatively high-risk
operations.This is clear from the
number that are forced to cut back or go out of business each year.Profit is not a dirty word.It is the return they get for the risk.The profit comes from selling goods or
services at a price people are willing to pay.There is no force or coercion.You buy brand A or Brand B from Store A or Store B, or you don’t buy at
all, or you buy a similar product that is almost as good.It is a free exchange.In millions of transactions a day, both
parties are satisfied.When you check
out, they say thank you (for the purchase) and you say thank you (for the
product).But we hear on the news only
of the scams or illegal operations, just like we hear only about the few airline
crashes and not the millions of safe landings.

Most businesses are not greedy and evil.Most business people are no more greedy and
evil than anyone else.Smart businesses
know the key to their success is a group of loyal, satisfied customers who
return and spread positive comments.Again, it’s often the tinkering – government favoritism, crony
capitalism, regulations that impede competition or favor a small group – that
screws up the balance.

Those, very briefly, are the keys to economic understanding: only people have money, risk/reward, supply and demand, business and profit in a free enterprise system and the dangers of tinkering with the balance.Thinking about these principles helps anyone
do a respectable job of predicting the future.

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About Me

is highly qualified to comment on the connection between our behavioral choices and the results we get. His formal education and training in observing and classifying behavior is supported by more than 40 years of practical business experience and 10 years of personal research. He is a West Point graduate with two Master’s degrees in business.
He is also a published author, Master Gardener and RYT200 yoga teacher.